Relationship between Entrepreneurship, Innovation, and Economic Development

Topics: Entrepreneurship, Innovation, Joseph Schumpeter Pages: 10 (2601 words) Published: April 25, 2014
Discuss the relationship between entrepreneurship, innovation and economic development. What role if any do creativity and problem solving play in this relationship? Refer to both theory and examples from the business world to support your discussion.

Thomas Edison once said, “I never perfected an invention that I did not think about in terms of the service it might give others...I found out what the world needs, then I proceed to invent.” This highly recognised inventor and innovator, the creator of the light bulb, is a perfect example of how sheer entrepreneurship and innovation has helped solve problems and develop our world to where it is today. In this essay, I will discuss how entrepreneurship, innovation and economic development interlink in a ‘‘triangular relationship’’ and how creativity and problem solving influence this connection, as discussed by theorists such as Joseph Schumpeter. I will also examine three current global businesses, Apple, Ryanair and Groupon, who I consider pivotal to our changing world.

Entrepreneurship is a very subjective topic amongst theorists such as Richard Cantillon and Jean Baptiste Say. However, the most widely accepted theory is that of Joseph Schumpeter who states “everyone is an entrepreneur only when he actually carries out new combinations and loses that character as soon as he has built up his business” (Lumsdaine & Binks 2007 p.13). This was deduced from his view that as soon as the combined factors of production (land, labour, capital and enterprise) have become established, the uniqueness is gone and the term entrepreneur no longer applies. (Lumsdaine & Binks 2007 p.13) “Entrepreneurship is the result of what entrepreneurs do and refers to events and their economic impact” (Lumsdaine & Binks 2007 p.11). Many factors help to create a successful entrepreneur who increases economic development by applying innovation and creativity to solve problems. “Economic development is the process by which a community creates, retains and reinvests wealth and improves the quality of life” (Fort Madison 2011) In Joseph Schumpeter’s book ‘The Theory of Economic Development’, he connects entrepreneurship, creativity and economic development by highlighting the entrepreneur’s role as the innovator and a motor force of growth and technological change, driving economic development through creative destruction and new products and processes.

Divergent thinking is the “ability to think sideways and recognise and suspend implicit assumptions and relax our self imposed rules and constraints” (Entrepreneurship & Business 2011 slide 31). Through using this, Schumpeter states that the undertaking of new ideas or ‘combinations’ to create radical innovation, are what makes entrepreneurs the bearers of the mechanism for change and economic development. (Karlsson et al 2004) He believes these “new combinations constitute better ways to meet existing demand or create new products, often making current technologies obsolete” (UNCTAD 2004) through creative destruction. Creative destruction is “the breaking down of the logjam of resistance which enables a wave of information or paradigm shifts to occur that will often cause the replacement of an existing technology with a new one” (Lumsdaine & Binks 2007 p.15), that is, replacing old with new, more efficient methods. He states this process is fed by the innovative activity of entrepreneurs as it “causes constant disturbances to an economic system in equilibrium, creating opportunities for economic rent” (Wong et al 2005) as entrepreneurship ruins market equilibriums by creating new demand and supply. An adjustment in equilibrium means more entrepreneurs enter the economic system, continuing to fuel innovation and economic development. This supports Schumpeter’s theory that the higher the number of entrepreneurs, the greater the level of economic growth. (Wong et al 2005) Overall, the collaboration of theorists work concludes that by introducing...
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